Why Royal Bank of Scotland Group plc Will Be One Of 2013’s Winners

We tell you why Royal Bank of Scotland Group plc (LON: RBS) is heading for a very good year.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

There’s no denying that Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) has rewarded shareholders well this year, and it looks set to end 2013 on a high.

At 366p today, that’s a gain of 31% over its 279p price a year ago, with the FTSE 100 16% up over the same period. Of course, you would need to add 2.9% to the FTSE figure to cover its average dividend yield in order to get a proper comparison, while RBS hasn’t paid out a penny — but RBS is still well ahead of the index.

It’s been higher

The share price has actually been higher since the slump of 2009 and the UK government’s bailout — taxpayers still own 81% of the bank. In fact, the shares topped 576p in August 2009, and again approached 560p in April the following year.

So why is the latest bull run any more sustainable than that, and is 2013 really the bank’s turnaround year?

Well, that early post-bailout optimism was not based on any quantitative evidence and now appears somewhat premature, but this year we really do strong support for RBS’s return to financial health. City analysts are forecasting more than £1bn in pre-tax profit currently forecast for the year to December 2013, and that comes after a hefty £5bn loss recorded for 2012.

Show us the cash

And the profits have already started to roll in. Back in August 2013, RBS reported a £1,374m pre-tax profit for the six months to June, compared to a loss of £1,682m for the first half of 2012, telling us that the period amounted to “its first two consecutive quarters of overall profit since 2008“. Profit attributable to shareholders came in at £535m, compared to a loss of more than £2bn for 2012’s first half.

That alone would not be enough to restore confidence in the bank, but RBS has also made very good progress against the Prudential Regulation Authority’s new capitalisation requirements, which are aimed at reducing a repeat of a similar credit squeeze.

As of June 2013, RBS had boosted its Core Tier 1 ratio to 11.1%, or 8.7% on a fully loaded Basel III basis, and expects the latter to reach 9% by the end of the year, saying that it “incorporates the capital needed to fund targeted loan growth“.

The bank also told us its liquidity metrics are strong, and that the quality of its credit is improving — impairments for the first half of the year were down 15% in its core business, and down 24% in non-core areas.

The future

Looking further ahead, analysts are predicting a further 75% growth in pre-tax profit for the year to December 2014, with earnings per share up proportionately. That should bring the shares’ price-to-earnings valuation down to 12, below the long-term FTSE average of 14 and significantly under the mooted figure for this year of 21.

We should also see a return to dividends next year, albeit with a yield of only around 0.5%.

All in all, 2013 looks like being a great one for RBS shareholders.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Alan does not own any shares mentioned in this article.

More on Investing Articles

Front view of aircraft in flight.
Investing Articles

5 trends that could make more money for Rolls-Royce shareholders

While Rolls-Royce shares could be due a pullback, this investor sees five things on the horizon that could power them…

Read more »

A man with Down's syndrome serves a customer a pint of beer in a pub.
Investing Articles

Near a 10-year low! Is it time for me to dump this major FTSE 100 stock?

With his Diageo shares close to a 10-year low, Mark Hartley ponders whether it's time to say goodbye to this…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

2 very different stocks that pay above-average levels of passive income!

With yields of close to 10%, these two stocks are great for passive income. And that’s why our writer has…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

5 AI stocks to consider buying and holding for the long term

The global market for artifical intelligence is projected to grow exponentially. Here are five Foolish stocks to consider buying.

Read more »

DIVIDEND YIELD text written on a notebook with chart
Investing Articles

This dividend stock’s yielding 5.5% but its directors have sold nearly 15m shares this month!

Our writer takes a closer look at an AIM-listed dividend stock. But despite its impressive yield, some of its directors…

Read more »

Woman using laptop and working from home
Investing Articles

Should PayPal be on my list of shares to buy?

Is a 9% free cash flow yield from a growing business with a strong balance sheet enough to get a…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

1 bit of Warren Buffett advice I’m ignoring

Warren Buffett's take on buying individual shares may surprise some people. But there's a logic to it. What's our writer's…

Read more »

Close-up as a woman counts out modern British banknotes.
Investing Articles

£20,000 in savings? Here’s how it could be used to target passive income of £913 each month

Christopher Ruane illustrates the explosive passive income potential of buying dividend shares, using a £20k lump sum as an example.

Read more »